Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What is a consequence for the company when it enters administration?

1. It loses all assets

2. It gains additional financial support

3. It has an obligation to repay loans immediately

4. Creditors cannot initiate legal action

The correct answer is: Creditors cannot initiate legal action

When a company enters administration, one of the main consequences is that creditors cannot initiate legal action against the company. This is a protective measure designed to give the company some breathing space to restructure its finances and operations under the supervision of an appointed administrator. The aim is to maximize the chances of preserving the business as a going concern, which can ultimately benefit both the company and its creditors. During the administration process, the administrator takes over the management of the company and is responsible for addressing the company's financial challenges. Legal actions such as lawsuits, garnishments, and other enforcement actions are typically stayed or suspended, which protects the company from further financial distress while it seeks to develop a recovery plan. The other options do not accurately reflect the typical consequences of entering administration. While the company may not lose all its assets, it won't necessarily gain financial support without a strategic plan in place. Additionally, the obligation to repay loans is generally not immediate; the administration process allows for a reassessment of debts rather than instant repayment.